Benefiting from a growing young and well-educated population, Israel is world leader in research and development. The country, home to a thriving technology sector is focused on sustainable growth, with low levels of debt to gross domestic product (GDP). At Aberdeen, we have been investing in Israel for over 20 years, and believe the country offers long-term growth opportunity for investors.
Investment Manager Eduardo Figueiredo discusses Aberdeen’s outlook for Israeli Equities in 2017.
As Israeli stocks hover near all-time highs, is there any upside for investors in this small country? The creativity of Israel’s entrepreneurs – particularly in its thriving technology sector – and the openness of its market suggest that this $280 billion economy may still have room to grow.
Investors in Israel will have to weigh the enduring risks associated with this political hotspot against the potential for further growth. The extensive news coverage of unresolved disputes with the Palestinians as well as interstate conflict with Iran mean that politics are perhaps more front of mind for many investors than in other parts of the world, with some choosing to actively avoid or divest from Israel.
Political uncertainty can have a chilling effect on economic growth, particularly in the tourism sector, but a diversified economy such as Israel’s, with many of its productive resources taking the form of intellectual capital, is relatively well equipped to withstand them. Here are four positive indicators for investors considering Israel.
1) One of the world’s most open economies
Lacking a sizeable domestic market, Israeli companies have had little choices but to look to export markets. But they have significant advantages in doing so, relative to most countries of a similar size.
More than half of the world’s Jewish population is located outside Israel, predominantly in the United States, and many of its own citizens have been educated abroad, contributing to a labor force that is among the best educated and most networked in the world. The strength of Israel’s connections to the United States has provided its companies with exceptional access to the world’s largest economy. Almost 10% of the 473 companies listed on the Tel Aviv stock exchange at the end of 2014 had dual listings on other exchanges, mostly in the United States and London.
2) Innovation in spades
Israel’s economy is rated by the World Economic Forum as one of the most innovative in the world. Israeli companies have also been extremely successful in turning geographical and geopolitical challenges to commercial advantage, with Israeli firms holding leadership positions in fields such as cyber security and wastewater reclamation and desalination.
With massive data breaches hitting the headlines in the United States and other developed economies, the world market for cyber security software and services has been growing very rapidly. Israeli companies have enjoyed a competitive advantage due to a strong three-way flow of information among the military, industry and academia on emerging cyber security threats. In 2011 the Israeli government established the National Cyber Bureau to help coordinate collaboration among the military, education and business sectors to protect critical web-based infrastructure from cyber terrorists and criminals alike.
The result has been an explosion of interest in new cyber security ventures in Israel, with nearly $400 million invested in 78 companies over the past four years.
In the water conservation and treatment sector, Israeli companies have similarly succeeded in turning threat to advantage. Lacking plentiful fresh water, Israel has installed technologies that enable 86% of wastewater to be reclaimed for agriculture – the highest percentage in the world. On the back of this domestic experience, Israeli firms have built a strong presence as exporters of drip irrigation products, which reduce agricultural water consumption significantly. Expertise in these areas – and others such as medical devices and biotechnology – has fueled an upsurge in foreign direct investment into Israel in recent years. This stood at $4.4 billion in 2009 and climbed to $11.8 by 2013: almost a third of the investment came directly from the United States. According to Israel’s largest business information group, BDICoface, Israeli companies are in the front rank of entities registering U.S. patents – more than 3,500 in 2014, up 21% on the previous year.
3) Energy independence
The future health of the Israeli economy received a substantial boost in 2009 with the discovery of substantial natural gases reserves offshore. The largest of these discoveries, the Leviathan field in the Levant basin, contains an estimated 16 trillion cubic feet of gas.
Israel is expected to become an energy exporter by the end of this decade and the government is planning to establish a sovereign wealth fund to ensure that the windfall proceeds from this unanticipated source of public revenue are wisely invested.
4) A resilient, growing economy
The country’s economy displayed great resilience during the worldwide economic crisis, growing by 1.3% in 2009 while other economies were contracting sharply. This reflected structural differences in the Israeli economy that set it apart from many others. The country’s banks were relatively well capitalized and steep deposit requirements for would-be homeowners prevented the development of a debt financed housing bubble of the kind that occurred in the United States.
Also worth noting is that Israel’s government debt as a proportion of gross national product has declined steadily this century, to 67.6% in 2014 from 96.7% in 1998, according to the Bank of Israel.
These advantages have translated into substantial gains on the Tel Aviv Stock Market. The TA-25 is priced near seven-year highs at about 14 times its one-year projected earnings. But that compares with multiples of about 17 times for the Standard & Poor’s 500 Index and 16 times the MSCI Europe Index.
At the same time, Interest rates, already low, may be cut further to prevent the currency’s recent gains from curbing exports and to boost the economy, which expanded at just 2.8% in 2014, the lowest pace in five years, but a better rate than in much of the developed world. The country’s high levels of innovation and openness may bode well for continued growth.
This article was original published for MarketViewsby dianomiltd.
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International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments. Concentrating investments in the Israel region subjects an investment to more volatility and greater risk of loss than geographically diverse investments. Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.